This paper incorporates search frictions with endogenous job creation and destruction into a two country dynamic stochastic general equilibrium model to explain two macroeconomic facts. First, since ...the 1980s, European unemployment rates have risen substantially above USA levels. Second, the European business cycle has lagged the USA business cycle during the period of the Great Moderation. In the model, more generous unemployment benefits and greater employment protection (manifested as firing costs) can endogenously generate higher unemployment. These same policies will also create labor market frictions which slow the response of the economy to business cycle conditions.
•The US business cycles strongly lead business cycles in the Eurozone.•Eurozone unemployment is higher than US unemployment.•Labor market frictions such as unemployment benefits, firing costs and poor matching can explain both facts.
When a firing litigation is taken to court, only the characteristics of the employee's misconduct should be relevant for the judge's decision. Using detailed data from an Italian bank and aggregate ...macro data, this paper shows that, instead, local labor market conditions influence the court's decision: The same misconduct episode may be considered sufficient for firing in a tight labor market but insufficient otherwise. We reach this conclusion after taking carefully into consideration the non-random selection of firing litigations for trial. Although these results refer to the specific situation considered, they raise more general issues. For macroeconomists they suggest that higher unemployment rates may increase firing costs via the effect on courts’ decision criteria; thus, the real extent of firing rigidities cannot be assessed without considering the role of courts. For labor law scholars, these findings are important because, following traditional principles, the law should be applied in the same way for all citizens and over the entire national territory.
This paper studies the specific effect that firing costs can have on firms facing liquidity constraints. When firing costs are zero and a time gap exists between production and its associated ...revenues, firing allows firms to hold on to their liquid assets by saving on wages, and thus, allows firms to cope better with liquidity shocks when external financing is too costly or unavailable. I refer to this feature as labor's liquidity service. Higher firing costs reduces the value of labor's liquidity service, and thus, increases firms' incentive for hoarding liquidity and reduces firms' demand for production inputs. In addition to this negative effect at the creation margin of production, firing costs have a relatively higher positive effect on the destruction margin of production of financially restricted firms. This paper presents a model that develops these ideas and shows that the presence of firing costs has a stronger negative effect on the output of firms facing liquidity constraints. Regression analysis, based on country–industry panel data sets, provides empirical evidence consistent with the liquidity service effect of firing costs. I find a relatively stronger negative effect of firing costs on the output of industries with higher liquidity requirements and a relatively stronger negative effect of firing costs on the output of small, and more likely financially constrained, firms.
•I show the effects on jobless recovery of diminishing the power to fire an employee.•I resolve differences in sources documenting Employment-At-Will Exceptions.•I use dynamic regression models on a ...U.S. state panel from 1976 to 2010.•I test both changes in state unemployment rates and state-weighted GDP.•2 of 3 Employment-At-Will Exceptions significantly contribute to jobless recovery.
This paper studies the effects on jobless recovery of diminishing the power of an employer to fire an employee through Employment-At-Will Exceptions (EWEs). I use dynamic panel regressions with quarterly data ranging from 1976 to 2010 for the 50 states in the U.S. I test both changes in state unemployment rates and state-weighted GDP growth. I also resolve differences in the various sources documenting the three types of EWEs in different states and show two of the three contribute significantly to jobless recovery in the U.S. The results lend support to predictions of theory that increased firing costs decrease the rate of hiring during recoveries. Statistical tests show the adoption of both EWEs would slow decreases in the unemployment rate during recovery from recession by up to 0.352 percentage points annually.
In this paper, we argue that firms' firing strategies and the judicial strategy of dismissed employees depend to a large extent on labor judges' ability to shed light on the various cases. The model ...is cast as a sequential game with imperfect information featuring firms, employees and labor judges. The judges' error margin increases with the congestion of the judicial system. The game presents multiple equilibria which differ in the frequency of good workers fired for unfair motives and the frequency of unreliable workers who abusively sue firms for unfair dismissal. The probability that the judge sits with the employee appears to be positively related to the ratio between the severance payment for economic dismissal and the company fine for abusive dismissal.
We develop a theoretical model of firm dynamics and unemployment and characterize equilibria with tenure dependent separation taxes. The model is a version of the Lucas and Prescott island model with ...undirected search. Two equivalent decentralizations are considered: one with spot labor markets and one with long-term employment relations. We model “temporary contracts” as the special case of a separation tax that only applies to workers with tenure higher than J. While in principle these contracts require a J-dimensional state space, equilibrium allocations solve a simple dynamic programming problem characterized by two-dimensional inaction set(s).
•We develop a DSGE search model with endogenous job destruction.•We analyze the most important factors in matching the model with JCR/JDR cyclical data.•We incorporate wage rigidities, firing costs ...and unemployment benefits in the model.•Firing costs and the Hosios condition help explain the dynamics of JCR, JDR and JT.•Varying wage rigidities and unemployment benefit do not improve the results.
We construct a DSGE search model with endogenous job destruction, incorporating wage rigidities, firing costs and unemployment benefit. We investigate the most important factors in matching the model’s cyclical properties with empirical data, particularly those of job creation rates (JCR) and job destruction rates (JDR). Firing costs assist significantly in explaining the procyclicality of JCR, the negative correlation of JCR and JDR, and the persistence of vacancies. They also decrease the counter-cyclicality of job turnover. We also postulate that the Hosios condition helps explain the negative correlation of JCR and JDR and vacancies’ persistence. Varying wage rigidities and unemployment income, however, do not improve the results.
Pareto-improving firing costs? Karabay, Bilgehan; McLaren, John
European economic review,
12/2011, Volume:
55, Issue:
8
Journal Article
Peer reviewed
Open access
We examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the ‘invisible handshake’) in a labor market with search frictions. Employers promise as much wage-smoothing as ...they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments.
Empirical evidence suggests the existence of a negative relationship between rigidities on the labor market and the level of economic activity. In this paper, we provide a background of this ...evidence. We build a model where the employed worker chooses the optimal level of firing costs by maximizing her human capital. Performing a comparative statics exercise, we analyze the effects of labor market tightness on the optimal choice of firing costs. Our theoretical model shows the existence of an inverse relation between labor market conditions and the level of firing cost under plausible hypothesis.
PDF
